Deal is largest "clawback" so far in Ponzi scheme.
Giant financier General Electric Capital Corp. agreed on Wednesday to repay $19 million in interest and principal it received from the $3.65 billion Ponzi scheme orchestrated by Tom Petters, the former Wayzata businessman.
The GE settlement is the largest to date in a series of lawsuits seeking to recover false profits collected by investors and others who did business with Petters. So far, more than $284 million in assets have been collected, most of which will be repaid to victims.
At one time, GE was one of the principal lenders to Petters and his business interests. Petters' decadelong scheme involved soliciting investment funds from individuals and various groups to purchase consumer electronic goods from manufacturers and sell them to big-box retailers. However, no such transactions took place, and early investors were paid often generous interest rates with the funds that came from later investors.
In documents filed in U.S. Bankruptcy Court in St. Paul, GE denied "any and all liability," but it agreed to pay the $19 million settlement after a confidential mediation process with Petters bankruptcy trustee Doug Kelley.
In an interview, Kelley called the GE settlement "significant," given the lender's original legal position that the statute of limitations had expired on claims against it. "This sends a message to others" who have taken a similar position, Kelley said. "This was not just false profits, either. It went well into the principal of the loan."
GE Capital, based in the Norwalk, Conn., did not return a request for comment.
According to the agreement, GE and Kelley agreed to mediation after a year of talks to "avoid uncertainty, substantial expense and distraction associated with protracted litigation."
Kelley and his team of bankruptcy attorneys filed 201 clawback lawsuits two years ago seeking to recover $17 billion for victims of the scheme, although only a small fraction of that amount is likely to be recovered. Indeed, the original claim against GE was for $293.5 million.
The actual "phantom profits" sought by Kelley are in the neighborhood of $1 billion, but Kelly contends that all funds transferred between investors and Petters -- profits as well as principal -- were tainted if the investor knew, or should have known, that the Petters operation was a fraud.
During Petters' criminal trial in late 2009, witnesses for GE testified about repeated loan payment problems with Petters Co. Inc., including delinquencies and bounced checks. Government prosecutors claimed that GE knew as early as 2000 that the Petters operation was submitting false documents to make it appear that legitimate sales transactions existed with big-box retailers when none did.
The settlement reflected that testimony and asserted that GE "knew or should have known of Petters' fraudulent activity, or at a minimum failed to exercise reasonable due diligence" in its relationship with Petters.
"The trustee further asserts that [GE] obtained approximately $60.5 million in loan repayments after it was alerted to facts that put it on notice that Petters was not operating a legitimate business enterprise," the settlement said.
In the settlement, GE says that it extended credit to Petters and received repayment "in good faith" and that it was "an arm's length institutional lender" using "customary loan documents." GE terminated its $50 million line of credit with Petters in 2000, once his company settled its outstanding loans. Petters was convicted on 20 counts of fraud, money laundering and conspiracy, and sentenced to 50 years in prison.
David Phelps 612-673-7269